#100 The Seven Days that Changed the Regulatory Landscape of Crypto in the US

The thrilling seven days that preceded the approval of the ETH spot ETFs, and how they might change the direction of crypto regulation in the US.

What a way to reach the 100th issue of a newsletter. Shocking news worth an epic (and clickbait-y) headline. In our defense, this is definitely one of those occasions where crypto deserves some champagne. In the last weeks we have navigated plot twist after plot twist coming from the regulatory angle. And the outcome looks excellent for the industry. Let us guide you through the thrilling seven days that preceded the approval of an ETH spot ETF, and how they might irreversibly change the tone of crypto regulation in the US, finally giving good guys in this country a stable ground to plant their seeds. 

In recent months, US regulators have consistently rained in what otherwise looked like crypto’s parade of 2024. This year held the potential for a crypto resurgence, propelled by milestones such as Bitcoin's leap into the real world through ETFs, the halving and its powerful message on BTC's credibility, and renewed interest from venture capital firms. However, optimism has been tempered by the Biden administration's ongoing threatening stance.

However, this stance has shifted significantly and swiftly in recent weeks.

For months, we witnessed US regulators, led by the SEC and endorsed by the highest powers, up to the White House speaking on behalf of Joe Biden, apply increasing pressure on the sector.

The SEC was engaged in an enforcement spree. In a matter of weeks, Uniswap, Consensys, and Robinhood joined a long list of official suspects when they received their respective copies of Wells Notices (a Wells Notice is an official letter announcing upcoming enforcement actions). The list includes other heavyweights, either investigated, threatened, or directly sued, such as Coinbase, Kraken, or the Ethereum Foundation.

Broadly speaking, they are all vaguely accused of providing services that enable illicit securities trading in one way or another.

Crypto stood up for itself with strong arguments. While trading legal blows with the SEC, documents shared by Consensys proved that Gensler’s Commission was considering declaring Ether a security. Robinhood complained about the SEC’s lack of interest in meeting or providing clear feedback. Consensys and Uniswap fought back with well-backed arguments directly aiming at the SEC’s reasons to claim ETH is a security but also highlighting other weak spots in their case, like the lack of clear authority over crypto or the inconsistencies between government agencies.

But arguments didn’t seem to matter. The SEC's actions felt like an ideological crusade fueled by prejudice that trickled down from the highest spheres of the Democratic party. This, and the SEC’s lackluster attitude towards the spot ETH ETF compared to the ongoing dialogue with issuers that preceded the approval of the BTC ETFs, made the industry believe that ETH ETFs would be put down when the deadline came.

The American legislative arena was in the process of voting on two different regulatory measures in the same timeframe.

The US Congress held a vote to repeal SAB-121. SABs, or Staff Accounting Bulletins, are non-binding recommendations written by the SEC on how regulated financial companies must conduct their accounting. Despite being devoid of authority, SABs can have a strong impact on how companies operate, provide evidence of the regulator’s opinions, and point the direction future enforcement actions could take. SAB-121 required financial institutions to add to their balance sheets the digital assets held in custody on behalf of their customers. This recommendation would impose burdensome risk management obligations on companies related to assets they hold but do not have control over. A measure that does not apply to other customer assets besides crypto.

Also, the Financial Innovation and Technology for the 21st Century Act (FIT21) approached a vote. FIT-21 aimed to establish a regulatory framework for digital asset markets. It outlined clear consumer protections and clarified which digital assets are regulated by the Commodity Futures Trading Commission (CFTC) and which by the Securities and Exchange Commission (SEC). The bill pursued the goal of providing the much-awaited regulatory clarity for the crypto industry, protecting investors, and defining the distinction between a crypto token as a security or a commodity in the context of the United States.

In both cases, SAP-21 and FIT-121,  the Biden administration vocally opposed any outcome that could positively impact crypto. Secretary Gensler spoke openly against the implications of FIT-21, and so did the White House. White House spokespeople even declared the president would veto a congressional decision to repeal SAB-121.

But then everything took a turn in just seven days.

On May 16th, the SAB-121 was repealed with unexpected support from Democrats.

Four days later, on May 20th, out of the blue, rumors spread that the SEC was requesting some fine-tuning in ETH ETF applications, which was a clear sign of an unseen proactive attitude. Sentiment shifted drastically, and ETH’s price went through the roof.

On May 22nd, FIT-21 was approved with surprisingly high support from Democrats. And 24 hours later, on May 23rd, the approval of ETH spot ETFs put the cherry on top of an unforeseeable triumphant regulatory streak for crypto.

What the hell happened?

One thing seems clear: such a sudden shift in direction can only respond to political reasons. Crypto has been pushing for regulatory clarity, heavily investing in education and lobbying, and the industry’s arguments didn’t make the smallest dent in the discourse coming from crypto’s public enemies, notoriously led by Elizabeth Warren and Gary Gensler. The same arguments were tossed back and forth, accusing crypto of enabling crime and fueling authoritative enemy regimes and vaguely accusing cryptocurrencies of being securities in disguise, regardless of any evidence the industry produced.

This strong opposition from the Democratic high ranks was slowly making crypto a political asset for Republicans, which makes the change of heart from so many Democratic representatives make a little more sense. Probably Democrats were slowly realizing they were fighting a lost battle. The repeal of SAB-121 opened another wound in Gary Gensler’s reputation and could tilt the scale towards defeat in the many processes opened by the SEC.

We should also probably acknowledge the industry’s merit in delivering crypto’s message. One of the reasons to believe that regulators should be more open and creative in their approach to crypto is that there are very compelling reasons to do so! Crypto is new, exciting, and innovative, and the confrontational position taken by the government definitely stopped US citizens from making the country once again a world leader in a thriving sector. Kudos to the industry leaders, like Coinbase, Uniswap or Consensys, for standing strong and deploying the necessary resources  to fight the fight.

But probably the most determining event was Trump’s appearance on the scene. 

The man who owns the country's attention made his implicit support of crypto (expressed, for example, through his ludicrous NFT collection) very explicit. Trump put his supporters’ money where his mouth is, announcing that his campaign would accept Bitcoin donations and saying about crypto, with his quintessential sophistication, “the Democrats are very much against it (…), but I’m good with it.”

His position immediately made him the favorite candidate for a very powerful minority of American single-issue voters who were waiting for a clear signal to decide the direction of their vote.

To be fair, Trump had earned that support almost as vigorously as Biden had lost it.

Whatever the case, this week’s sudden change of mind from Democrats sets a very strong precedent—an irreversible one, in some cases. It also brings the US back to the path of becoming a crypto superpower.

These seven days will help the US correct the many aberrations that the staunch opposition of the Democrats in power had maintained against crypto. While projects worldwide enjoyed the creative freedom of deregulation, American entrepreneurs were tied hand and foot. While investors worldwide experimented with the benefits of the new decentralized economy, American citizens were excluded from crypto due to the regulators' overprotectiveness.

Bad actors in the crypto ecosystem continued to roam freely, while the good actors in the US gradually lost their ability to compete. This new landscape will give the good actors a solid ground on which to build.